Earnings Slump? Negative Company Guidance At Historic Low

Fourth quarter 2013 could be a major earnings disappointment on Wall Street, if you believe that a company’s negative-to-positive guidance ratio is an efficient prognosticator. Greg Harrison of AlphaNow points out the the N/P ratio is at an all-time high. This means that many more companies are guiding their earnings to be less than anticipated than companies are guiding their earnings to meet or exceed expectations.

Overwhelming negative guidance

According to AlphaNow, 112 S&P 500 companies have issued 4th quarter guidance to date. It has been negative guidance 103 times and positive guidance a mere 9 times. That converts to a 11.4 negative-to-positive guidance ratio, which is the most negative N/P ratio on record by a large margin. The next highest N/P ratio prior to 4Q 2013 was 6.8 in Q1 2001.

Aggregate earnings estimates

Analysts have already revamped their 4Q 2013 earnings estimates from a consensus 10.9 three months ago to a consensus 7.8% today. Several analysts have also pointed out that with the paltry 0.4% expected revenue growth, achieving even 7.8% across-the-board earnings growth seems rather optimistic.

Reasons for negative guidance

The main reasons companies are offering for their negative guidance for the fourth quarter are that consumers remain cautious about spending, and reduced government spending at all levels. The general belief is that consumers are just not as enthusiastic about spending, and holiday sales are unlikely to save the day this year. Surveyed sources mentioned the recent federal government shutdown and the ongoing federal budget sequester as important factors in the reduction in government spending.

Another possible reason for this quarter’s avalanche of negative guidance is that many companies had kept rosy full-year earnings estimates in place anticipating a significant pick up in the fourth quarter, and are now finally reading the handwriting on the wall and guiding lower.